PotashCorp: downgraded, capex reduced, but new urea brownfield

In a move that might appear contrary to its “Disciplined Approach” of “Matching Supply to Demand,” PotashCorp is quietly planning a potential new urea plant at Geismar.

More details of the brownfield project, which received its air permit in December 2015, are in my Research Note for Geismar, LA. The new urea plant is an addition to PotashCorp’s existing plans for a major ammonia expansion at that site.

However, PotashCorp has announced no timeframe for these expansions, and it seems likely that it won’t make any investment decision until it is confident of some meaningful price improvement in the urea market.

Moreover, in yesterday’s Q1 2016 earnings announcement, PotashCorp disclosed that it is reducing its 2016 capex guidance by $100 million, down to a range of $0.7 to $0.8 billion – which is also its guidance for 2017.

To get an idea of costs for the potential Geismar expansion, there are similarities between this project and the expansion that PotashCorp completed six months ago at Lima, OH. The Lima expansion included the addition of a KRES unit and a minor urea expansion, and cost $210 million in all, which was ~10% above the original budget. The Geismar project appears to be of a bigger scale, so it doesn’t look like there’s enough money in PotashCorp’s capex budget to fund any serious expansion work at Geismar until 2018, at least.

PotashCorp’s CEO Jochen Tilk explained the capex reduction in yesterday’s conference call, stressing that this reduced capex spending level represents the company’s minimum, just to maintain its assets – not to expand them:

“We took it down about $100 million, which is really the level that we can do without cutting into our sustainability projects. And to be frank, there is obviously a limit to that … I can tell you that’s about as far as we can go and that’s as far as we like to go because we strongly believe, and we’ve always done that, to maintain our assets in top quality.”

That said, PotashCorp has recently been vocal about the cost-effectiveness of its capacity expansion projects relative to the competition, and I wouldn’t put it past them to expand as much as they can afford. Although, in the following chart, PotashCorp might flatter itself when it compares the cost-per-ton of its own brownfield expansions and restarts with world-scale greenfield projects.